ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Like adverse selection, moral hazard occurs when there is asymmetric information between two parties, but where a change in the behavior of one party is exposed after a deal is struck. Adverse selection occurs when there’s a lack of symmetric information prior to a deal between a buyer and a seller.

Detailed explanation-2: -Moral hazard occurs when there is asymmetric information between two parties and a change in the behavior of one party occurs after an agreement between the two parties is reached. Asymmetric information refers to any situation where one party to a transaction has greater material knowledge than the other party.

Detailed explanation-3: -The adverse selection is a problem of asymmetric information and occurs before the transaction. This problem arises where there is a hidden characteristics problem and people on the informed side of the market self-select in a way that is harmful to the uninformed side ( Katz, M.L. and Rosen, H.S, 1998: 565).

Detailed explanation-4: -There are two types of asymmetric information – adverse selection and moral hazard.

Detailed explanation-5: -Adverse selection occurs in a context where between two parties, one has more information which he intends to use against the other person or rather take advantage or benefit more compared to the other party. The availability of adverse selection results in moral hazard.